Oil drops the most in two months as equities decline on Europe

Oil tumbled the most in two months after equities dropped on political turmoil in Europe and as Middle East tensions eased on the prospect of renewed talks between Western countries and Iran.

Futures slipped 1.6 percent and the euro weakened amid opposition calls for Spanish Premier Mariano Rajoy to resign following contested reports about illegal payments. Iran considers an offer by U.S. Vice President Joe Biden to negotiate directly over its nuclear program a “step forward,” Foreign Minister Ali Akbar Salehi said.

“We’re seeing a generalized selloff in all the markets as the problems of the Spanish prime minister are a reminder of the big issues that remain in Europe,” said John Kilduff, a partner at Again Capital LLC, a New York-based energy hedge fund. “Oil is also down because of Biden’s overture to Iran and the Iranian response. This is reducing the security premium slightly.”

Crude oil for March delivery dropped $1.60 to settle at $96.17 barrel on the New York Mercantile Exchange. It was the biggest decline since Dec. 6. Trading was 13 percent below the 100-day average at 2:37 p.m. Futures have retreated 1.7 percent in the past year.

Brent oil for March settlement fell $1.18, or 1 percent, to $115.58 a barrel at 3 p.m. New York time on the London-based ICE Futures Europe exchange. The contract settled at $116.76 on Feb. 1, the highest level since Sept. 13. Trading volume was 9 percent above the 100-day average.

The European benchmark grade was at a $19.41-a-barrel premium to West Texas Intermediate futures traded in New York. The spread widened from $18.99 on Feb. 1.

Unauthorized Funds

Stocks retreated along with Spanish and Italian government bonds amid signs of returning political uncertainty in two of Europe’s weakest economies.

In Madrid, opposition leader Alfredo Perez Rubalcaba said Rajoy should resign after reports in El Pais newspaper that he or members of his People’s Party received the unauthorized funds. With elections looming this month in Italy, former Prime Minister Silvio Berlusconi narrowed the lead of front-runner Pier Luigi Bersani.

The Dow Jones Industrial Average declined 0.7 percent, and the Standard & Poor’s 500 Index fell 0.8 percent. The Dow exceeded 14,000 last week for the first time since October 2007. The euro decreased as much as 1 percent against the dollar. A weaker euro and stronger U.S. currency reduce the appeal of dollar-denominated commodities as an investment.

“We’re seeing a strong correlation between equities and oil today,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “The dollar is stronger today, which is going to hurt commodities.”